Financial Feasibility Study : Basics

The financial feasibility study (FFS) is the web that ties the economics of the project together. On the one end we have the revenue stream and on the other end the operating and development costs.

The FFS is like the compass on a ship or a GPS in the car. It tells you where you’re heading. And if you’re heading in the wrong direction, what to do about it. Without the FFS you might as well be lost – financially speaking. FFS can also be used as a valuation tool – the principles are the same.

There are several degrees of complexity to the FFS. It can be as simple as a P&L type study – revenue less cost = profit margin – or as involved as a discounted cash flow analysis where the time value of money is taken into consideration. At further levels of complexity you look at the sensitivity of outputs to inputs or employ probabilistic models like monte carlo simulations.

The heart of the FFS is the Cost of Capital. It’s the single most important determinant of whether your project is worthwhile undertaking or not.

The output and interpretation of the FFS is what’s important for you to know : Yield, Payback Period, ROI, IRR, NPV,NOP, EBITDA, NCF, OCF.

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